Why restaurants have surcharges

Earlier this week, a Chronicle front page story reported on how the city is investigating San Francisco restaurants that place a health care surcharge on diners’ bills. Consumers are stuck somewhere in the middle. Today, we try to understand why San Francisco restaurants even bother with surcharges anymore.

The Sunday story came on the heels of City Attorney Dennis Herrera’s crackdown on restaurants that haven’t spent all the proceeds from the surcharges on employees’ health care. It’s important to note that Herrera is not saying which restaurants are being targeting, but he is working off this list of 93 businesses that collected more in surcharges in 2011 than they spent on employee health care.

As the article made clear, none of the restaurants have yet been charged, though Patxi’s paid a six-figure settlement with the city when it learned it was in violation. And of course, it’s very much worth highlighting that there are several thousand San Francisco restaurants — with and without menu surcharges — that are not on the list, because they are apparently in accordance with the law.

When reached for comment, most of the restaurant folks on the list claimed innocence, expressed confusion, and/or shared their disappointment that the list had been made public. The two restaurants with the biggest difference between the money spent and collected — Michael Mina and Wayfare Tavern — both simply said that the unspent money remains untouched in a dedicated account, available for employee use.

Squat & Gobble sang a similar tune: According to the list, Squat & Gobble collected $160,498 from surcharges, but is the only restaurant that spent nothing. Owner Issa Sweidan did not return repeated calls or emails, but an employee at the Lower Haight branch confirmed that Squat & Gobble still levies the surcharge even though it doesn’t appear on the menu. The employee, who wished to remain unnamed, also insisted that health care is available to all employees, via a “fund set aside” for them. During the hiring process, employees are told how to access the fund, he added; take it for what it’s worth. Other restaurants thought they were following the rules; still others have had the surcharge gone for a while, since the list applies to 2011.

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In the course of reporting the story, however, other issues came to light. City officials aren’t happy with the surcharges and diners gets confused, especially when bad publicity like the crackdown comes out. Michael Bauer has been vocal in his disapproval.

So why are restaurants still insisting on surcharges? Why not just raise prices and not deal with any of the drama?

Following are some reasons that restaurants are clinging to surcharges, though as one restaurateur put it, it’s getting harder and harder to explain what he calls a “defensible policy.” This is not say that surcharges are correct or incorrect, but this is the rationale for many restaurants.

Many restaurants pay a percentage rent. This is one of the strongest — and least known — reasons for surcharges. Many restaurants’ rent payments are based on a sliding scale on their profits, so if a restaurant raised menu prices across the board, the biggest beneficiary is the landlord who collects more rent. Surcharges — in an ideal world — would be separated from the main check so they can be directly allocated to employee health care. Again, that’s in an ideal world.

Restaurants are in competition. Bradley Levy, chef-owner of Firefly, didn’t include a surcharge when Healthy SF was first enacted. Eventually, as he saw his competitors keep prices low with a 4 percent surcharge, they decided to follow suit and tack on a surcharge rather than raise prices.

“We have our prices as high as we feel comfortable for a neighborhood restaurant so there’s no way we can raise our prices,” he said. “To compete on an even playing field, we thought that maybe we should do this.”

He continued: “We didn’t do a 4 percent surcharge. That seemed unfair to someone buying a $100 bottle of wine. We did a $1.50 per person health charge on the menu at first. After the first year, we looked at it and we were coming out a little bit on top so we dropped it to $1.25, which brought us a little below, but we were trying to make it fair … We took off the surcharge this year because it was so confusing. I know there are some [other] people taking advantage of the situation and I don’t think that’s right.”

San Francisco is expensive. Yeah, it’s a song that gets sung at every standoff between the city and restaurants, but it’s true. The cost of doing business in the city is high. Doug Biederbeck of Bix and MarketBar says his labor costs are up 20 to 25 percent in the last five years, due to the increasing minimum wage (now the country’s highest) and Healthy SF.

But he says that the lack of tip credit is the big expense. California is one of several states that doesn’t allow tip credit, which would reduce the minimum hourly wage for waiters. Waiters earn the same minimum wage as the rest of staff, plus tips; in some restaurants, waiters earn as much as $45 an hour.

“If we had a tip credit, the entire thing would be moot. This is what I don’t believe the supervisors or anyone else wants to hear about,” says Biederbeck.

Surcharges are a way to lessen the costs of doing business, plain and simple, which leads us to…

Restaurants can simply change the language. Don’t forget that Herrera is cracking down on “consumer fraud” — restaurants that tell customers that the surcharge is going to health care when it isn’t. Already, you’ll see modified language on menu surcharges around town — restaurants saying that the surcharge is for a number things, like health care, city fees, minimum wage increases and so on.

Restaurant owners are confused. Skip Young, partner at AsiaSF was at a loss for words when he learned that AsiaSF was on the list. He said he thought they were doing what they were supposed to be doing, and now they’re being told they’re wrong: “We took our direction in general from the GGRA. We complied with what we thought we were supposed to be doing.” His confusion was echoed by many others. Patxi’s was in violation, but they claimed they didn’t know they were in violation.

Restaurateurs say that there are gray areas the city hasn’t considered, and that there hasn’t been proper outreach and education. Some say the laws have turned unqualified restaurants into makeshift insurance companies, and since the mandate is a per hour/per employee assessment, different owners wagered different guesses as to how to pay for it. Throw in other factors, like the fact that many restaurant employees work at multiple restaurants, and the whole situation gets convoluted.

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At the end of the day, no matter how many restaurants get targeted, whether it’s 5 or 50, this whole situation is a financial and public relations mess for restaurants. It’s both a black eye and broad swipe.

Now we’ll have to see what, if anything, the city’s investigations yield. But even though many innocent restaurants are likely (and yes, possibly unfairly) grouped in with violators on the big list, the restaurant industry shouldn’t take issue with the city for cracking down on the situation, even if the city isn’t handling the situation in the best way possible. Instead, the restaurateurs should take issue with those few bad apples within their ranks, their fellow owners who sullied the spirit of the law.